Author: Detlev S. Schlichter
Publisher: Wiley – 267 pages
Book Review by: Nano Khilnanani
Detlev Schlichter has rendered an invaluable service to us with this book by warning us of the dangers of printing paper money.
Through five parts and 10 chapters of this book, he takes us on a journey from the basics of money, what purposes it serves and how supply and demand determine its value, to the harmful effects of paper money-creation unsupported by hard assets that are not unlimited and relatively cost a lot more to produce.
He explains the fallacies about price levels and relates to us the legacy of failure in the history of paper money. Finally, he proves to us that massive money-printing will have no other outcome but a collapse of currency.
Rampant printing of trillions of dollars has been going on in the last few years (particularly after early 2009) in the United States. No hard assets such as gold or silver have backed them up.
Prior to 1971, each United States dollar printed was backed up with reserves of gold. When President Richard Nixon lifted the gold standard in 1971, presidents were no longer required to have gold backing up backing up paper currency.
Occasionally we read reports in the business pages of newspapers about the Federal Reserve’s ongoing program of ‘quantitative easing’ but I suspect most people do not know what that phrase means. It refers to printing of physical dollars or the creation of electronic money that is added to the money already in circulation (paper and electronic). in the United States and abroad. But such a practice cannot go on for much longer.
Much of the recent creation of electronic and paper money has occurred due to massive deficit-spending by the Obama administration. In each of the years since 2009, hundreds of billions dollars allocated for deficit- spending in his Federal budgets (and in ‘stimulus’ programs) far exceeded government revenues.
So the difference of the money needed by the Obama administration to spend over its total revenues had to come from somewhere. It came through borrowing from overseas or the U.S. public, and from the creation of electronic money and the physical printing of dollars.
Even as much of the deficit-spending was done with newly-created money, the debt of U.S. government (often referred to as ‘national debt” even though individuals did not play a part in creating it) still grew from borrowings. The debt was $10.626 trillion on January 20, 2009 and it has grown to $15.356 trillion today, Feb 15, 2012, an increase of $4.73 trillion or 45 percent in about three years, an average annual increase in debt of $1.5 trillion.
The author, who has been international finance for about two decades and has handled billions of dollars in assets, warns us that “all paper money systems in history have failed. Either the paper money experiment was abandoned voluntarily by a return to inelastic commodity money (such as gold or silver) or involuntarily and violently, by the inflationary meltdown of the monetary unit with dramatic consequences for the economy and society. No complete paper money system has survived.”
Fortunately for people all over the world (not just for U.S. residents because the dollar is currently the largest-circulated currency in the world) most presidents before Barack Obama have been prudent by restraining the quantity of dollars being printed.
But unfortunately for you and me and the billions of other people on earth, the trillions of U.S. dollars added (since early 2009 when Obama was sworn in) to the world’s currency supply may destroy the livelihood of more people than you and I can imagine.
That the price of gold has skyrocketed in recent years is not a reflection of higher scarcity or much lower mining and production cost of that precious metal. Rather it is the reflection of a relatively much, much larger number of paper and electronic U.S. dollars – in the trillions – manufactured and added to the supply held by banks and people worldwide.
The law of supply and demand dictates that when there is overabundance of a commodity, its value plunges downward and the eventual outcome is total collapse. History gives us several stark examples, the most notable relating to the German mark in the Weimar Republic in the 1920s and the Zimbabwe dollar from 1998 onward.
The hyperinflation and severe loss of value of their currencies were simply incredible.
Wikipedia details the hyper-inflationary period in Germany’s history from 1919 to 1924. The severity of the crisis began in 1921 when the German mark had an inflation rate of about 80 percent. But by 1924 one gold German mark was worth one trillion paper marks. There were bank notes of 50 million marks readily available. And bank notes of many denominations of marks were used as wallpaper. Were the notes worth less than the cost of the paper they were printed on? Perhaps.
The Zimbabwe dollar had an inflation rate of just 7 percent in 1980 when Canaan Banana became president and remained in office until 1987. In that year when Robert Mugabe came into power, the inflation rate was still a modest 10 percent.
But within four years after Mugabe was at the helm, the Zimbabwe dollar’s inflation rate had climbed up and by 1991 it was at 48 percent. The rate went up and down and it was again at 48 percent by 1998.
But each year after 1998, it got progressively much worse. By 2005 the inflation rate was a whopping 585 percent. The following year it more than doubled to 1281 percent. By 2007 the Zimbabwe dollar’s inflation rate had shot up unbelievably to 66,217 percent. In the following year all hell broke loose and the inflation rate of the Zimbabwe dollar was an unfathomable 231 million percent!
We have presented these details to point out that no currency is immune from losing a lot of value, even the United States dollar, as demonstrated history and by recent rises in the prices of precious metals. The production and supply levels of gold, silver, platinum and other metals have not gone down. Precious metal demand has gone up, partly because of the declining value of the U.S. paper dollar, which is due to its massive printing.
History has shown that massive money-creation has but one final eventuality: collapse.
When leaders and politicians do not demonstrate responsibility or respect for a country’s currency by printing them or electronically creating the billions and trillions of them, do not discuss or conceal the severity of a crisis, create a false sense of security with a captive and complacent media just to get reelected, even they face eventual ouster.
